Banking Unconditionally: The Political Economy of Chinese Finance in Latin America

Abstract

Globalization scholars have long-debated to what extent economic integration, and specifically, mobile private capital constrains national policymaking. With Western capital reeling from the 2008 financial crisis, state-owned capital made inroads globally. China, as the world’s largest saver, expanded its cross-border lending, funneling almost US$300 billion to developing countries since the crisis. What are the implications for debtor governments’ room to maneuver? I contend that China’s state-led capitalism is an important form of patient capital, characterized by a longer-term horizon. I argue that its rapid global expansion has transformed the traditional relationship between economic interdependence and national policy autonomy. Without the market’s threat of short-term capital withdrawal, national governments have considerably more room to maneuver. Given the recent emergence of Chinese financing, I employ a comparative case study analysis of two of China’s largest debtors, Brazil and Venezuela, before and after the introduction of Chinese credit. I find that government budget deficits increase as Chinese state-to-state financing accounts for a larger share of total external public financing. These findings offer important new insights for the study of globalization, Latin American development, and China-Latin American relations, by helping explain the conditions under which nations veer from Western governance models.

Keywords: economic policy, Latin America, China, investment, lending, fiscal policy, economic governance

JEL Classification: F00, F30, F40, H00, H30, H60, N10, N20, N16, N26, O10, O54, P50, P51